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State of the economy THE Economic Survey 2005-06, released on Saturday, says that Pakistan is in the midst of an economic upswing and, with a few exceptions, all its macro-economic indicators show a marked improvement. Included in the survey are also some broad indicators over a four-year period from Pakistan Social and Living Standards Measurement (PLSM) Survey carried out by the Federal Bureau of Statistics which is to be released shortly. In most of the socio-economic indicators, the PLSM shows a significant improvement over the last four years. The number of households living in one room homes has declined from 38.1 per cent in 1998 to 24.4 per cent in 2004-05. Households using tape water as a major source of drinking water has increased from 25 to 39 per cent. Net enrolment at the primary school level has risen from 42 to 52 per cent. Literacy rate is up from 45 to 53 per cent; male literacy has risen from 58 to 65 per cent and female literacy rate from 32 to 40 per cent. Adult literacy rate is up from 43 to 50 per cent. During the nine months of the current fiscal year, the trend towards increased poverty and social sector-related spending was also maintained and amounted to Rs 191 billion against Rs 156 billion during the same period last year. The survey also claims that the national economy is undergoing structural shifts marked by rapid changes in consumer spending pattern. The real private consumption expenditure has more than doubled from 8.2 per cent to 16.8 per cent suggesting the emergence of a strong middle class with buying powers. No doubt the per capita income has touched a record $736 as a result of a high growth rate but the weakening of the trickle down effect in the current phase of development and the absence of any effective distributional policies, or any significant avenue for the poor to access assets, the general perception is that middle classes are shrinking with rampant unemployment and incomes being eroded by unchecked inflation. In fact, latest market reports suggest that consumer finance by banks has fuelled overspending with loan defaults surfacing as a result of recent interest rate hikes. Much of consumer spending has been encouraged by consumer financing (auto, housing, personal loans and credit cards) which accounts for Rs 77 billion or 23 per cent of the total private sector credit. Whether it is income or debt driven, only time will tell. No doubt, as happened in the 1970s when poverty levels were cut despite slower economic growth, the remittances, currently running at nearly $4 billion annually, may once again be helping to reduce poverty by allowing families to maintain or increase expenditure on basic consumption — housing, education and small business. In case of developing countries, an IMF study says that the remittances help improve the development prospects, maintain macroeconomic stability, mitigate shocks and reduce poverty. This may be equally true for Pakistan. Notwithstanding significant improvements in social and economic indicators, the survey acknowledges that the pace of improvement so far has been slow and needs to be accelerated. It admits that to sustain momentum of growth, policy-makers face the challenge of job creation, poverty alleviation and, most important strengthening the country’s physical infrastructure to support seven to eight per cent growth in the medium term. The government is trying to tackle these problems with a rapid increase in development spending but poor project implementation is a big impediment and requires much better management. The quality of growth is as important as a high rate of expansion, with a good potential for employment generation and improved key macro-economic indicators. One would agree with the observation in the survey that every citizen should feel uplifted by real GDP growth of 8.4 per cent that matches that of Singapore and has turned Pakistan as the second fastest growing economy after China. It is for the third year that growth rates have overshot set targets. A broad-based stellar performance in large-scale manufacturing with growth at 15.4 per cent is contributing significantly. But it is the outcome of national industrial consolidation rather than expansion for which incentives are badly needed. An impressive agricultural growth of 7.5 per cent can be attributed as much to favourable weather as to a policy package, including enlarged credit for this sector. The performance of livestock, the single largest contributor to agriculture, has been lack lustre. Sugarcane production has declined by 15.2 per cent because of severe water shortage, while the rice crop rose by 2.9 per cent. Farm output suffers from low yields because of traditional practices and the virtual absence of corporate farming. The landownership is concentrated in a few hands and the market for farmland has not developed. Agriculture needs to be modernized. Looking at the quality of growth, the economy has acquired greater strength but with reversal in a few key macro-economic indicators like a large trade deficit approaching five billion dollars this year. While the sustained economic growth over past three years leaves the impression of a stable and resurgent economy, rising inflation and widening trade gap bring into question sustainability of long-term growth. The current account balance has slipped into the red after posting surpluses for three consecutive years. This year has also seen inflation rising to highest in eight years, hurting the poor and fixed income groups the most. As the growth rate surpassed all expectations of the policy-makers, they were not fully prepared for taking prompt and effective measures for either containing inflation or reducing trade deficits. But one cannot agree with the observation that the widening trade gap is not worrisome as long as it is caused by rising imports, which widen the production base. The situation appears comfortable because of debt write-off and current levels of capital inflows that provide a strong balance of payments support. The foreign debt-export earnings ratio is much better. But all these are variables and the global markets are volatile in the current process of restructuring. The risks of possible exogenous shocks cannot be ignored, more so when the domestic industrial consolidation would probably lead to expansion. In such a case, imports could continue to outstrip exports unless a strong policy of import substitution is adopted. Adverse global factors like rising oil prices, falling dollar, rising inflation and interest rate have their own impact on developing economies like Pakistan’s. Whereas the exit from the IMF and the successful accessing of the international financial markets for funds indicate that the country’s sovereign risk has come down, the flow of foreign direct investment at $891.5 million during July-April 2005, though up from the $760 million last year, is a trickle compared to regional and global standards. Half of it is estimated to have come from privatization. Besides, the fixed domestic investment grew this year by 15.6 per cent against a sharp rise of 17.4 per cent last year. There is yet another downside to the current market situation. The stock exchange crash early this year has shaken the confidence of small investors which needs to be restored by better regulation and monitoring of the authorities. As the economy is expanding at its fastest rate in two decades as stated in the Economic Survey, it offers a good opportunity to do away with imbalances, and lay a strong foundation for sustained future growth. But what has been achieved so far is a great step forward. Please Visit our Sponsor (Ads open in separate window)
